7 Unexpected Events That Could Blow Apart Investor Portfolios In 2013

The number of moving parts in the global economy and world financial markets is more apparent than ever.

In the United States, the fiscal cliff is coming into focus post-election.

And the sovereign debt crisis in the eurozone continues, although it has abated somewhat in recent months.

While the fiscal cliff and the euro crisis have been consistently at the forefront of investors' minds throughout this year, there are plenty of other big risks to markets and the economy as well that haven't garnered the same attention and awareness.

Some of those risks are even to the upside.

BofA strategists Kate Moore, Michael Hartnett, Benjamin Bowler, and Swathi Putcha sent out a research note examining seven of those lesser-known "tail risks."

The team writes, "Though we believe each of the seven is a low probability event – generally a tail risk is considered a 1-in-10 chance – any one could have an outsized impact on portfolios."

Europe makes an economic growth comeback

RATIONALE: Not many expect growth to return to Europe next year. ECB chief Mario Draghi said it himself the latest ECB press conference. And BofA notes that only 9 percent of clients expect above-trend growth in Europe in 2013.

However, BofA says, "just as we saw in Asia in 1998 and the US in 2009, once global policy coordination leads to a dramatic decline in bank funding and interest rates a pickup in economic activity is normally not far behind. The one missing ingredient that Asia had during its debt crisis that Europe does not is a much weaker currency."

Source: BofA Merrill Lynch

Wall Street's collateral crunch intensifies due to regulation

RATIONALE: Major financial regulatory reform measures like Dodd Frank and Basel III require banks to hold much more capital than they did before in order to have a larger buffer against future shocks. However, those increased capital needs translate directly into demand for safe assets.

In that case, BofA says, "Analyst Philip Middleton notes that there could be $2.4tn of additional collateral requirements...The combined impact of bank demand and depositor demand for “risk-free” instruments pushes Treasury yields (particularly short-dated) to new historic lows."

Source: BofA Merrill Lynch

US employment really takes off

RATIONALE: BofA calls the U.S. labor market "the last area of significant weakness in the economy." And with the veil of uncertainty from the U.S. election rising and the fiscal cliff coming into focus, the uncertainty factor could soon recede, leading businesses to hire more and send unemployment lower.

If that happens, BofA says, it "puts upward pressure on wages and inflation" and will force the Fed to begin tightening monetary policy sooner than expected.

Source: BofA Merrill Lynch

China does a big currency devaluation

RATIONALE: The Chinese economy is showing signs of stabilizing, but it's not a done deal yet. If problems come to roost in China's fragile real estate, construction, and banking sectors, China could be forced to temporarily abandon its plan to grow domestic consumption and instead focus on export growth to get back on its feet. In that case, it could decide to devalue the RMB.

With most of the developed world already easing monetarily, BofA says "emerging markets [could] also join the currency 'race to the bottom,' sparking a wave of global inflation and damaging consumer purchasing power around the world," and as a result, "countries enact capital controls and trade imbalances grow."

Source: BofA Merrill Lynch

The 30-years-and-running bond bubble bursts

RATIONALE: The U.S. sailing over the fiscal cliff, a downgrade of U.S. government debt, or a spike in inflation expectations could all lead to a disorderly rotation out of the bond market and into risk assets – this comprises one potential pathway to BofA's "Great Rotation" scenario that they are calling for next year.

In that case, BofA says it could cause "Investment grade credit spreads widen significantly," and "the rise in funding costs forces investors to come out of carry trades."

Source: BofA Merrill Lynch

Conflict forces a full blown Iranian oil supply disruption

RATIONALE: BofA notes that Iran is still the fourth-largest OPEC oil producer, despite Western sanctions that went into effect over the summer. BofA commodity strategist Francisco Blanch says that a full blown supply disruption in Iran could lead to a $20-40 increase in oil prices.

In a more extreme scenario, BofA says, "the potential fallout from an Iranian strike could be much, much greater," and "a sustained rise in oil prices above $150/bbl would likely result in a recession."

Source: BofA Merrill Lynch

The US loses its energy advantage

RATIONALE: BofA notes that positive trends like increased domestic shale gas production and the resulting improvement in the country's import/export balance of energy commodities has lifted GDP by 2.2 percent, according to commodity strategist Francisco Blanch's estimates.

However, BofA says an "unforeseen environmental disaster" could change the game dramatically. He cautions:

Energy costs would likely rise, and US equities would likely suffer as one of the region’s structural advantages would be removed. Within the US, consumers and businesses with high reliance on energy costs would be among the first to feel the pinch from higher energy costs.